More Treachery at the Fed
by Mike Whitney
June 24, 2011
No one expects the Fed to announce a rate-hike at the end of the today’s FOMC meeting, but that doesn’t mean there won’t be a few surprises. The problem is that the recovery has stalled and the Fed can’t decide whether we’ve just hit a “soft patch” or if it’s something more serious. If it is more serious, then the Fed will need a contingency plan for kick-starting the economy. So, what’s it going to be; another round of Quantitative Easing (QE), rate caps on short-term Treasuries or something else altogether? That’s what the financial media will want to know, and only Fed chairman Ben Bernanke knows the answers.
But before we get to that, let’s look at the economy. First quarter growth has been revised to an anemic 1.8 percent and economists are currently shaving their estimates for Q2. Some think that the high number of “black swan” events (Tsunami in Japan, debt problems in the eurozone) are mainly responsible for the poor growth, but that doesn’t explain the sharp downturn in hiring, manufacturing, housing and consumer confidence. The US is experiencing a dropoff in demand at the worst possible time, just as Obama’s $800 billion fiscal stimulus and Bernanke’s $600 billion monetary stimulus are running out of gas. That means even less support for an economy that can barley stand upright as it is. Here’s an excerpt from an article by Nouriel Roubini with a rundown on the economy:
“…there are good reasons to believe that we are experiencing a more persistent slump…. the factors slowing US growth are chronic. These include slow but persistent private and public-sector deleveraging; rising oil prices; weak job creation; another downturn in the housing market; severe fiscal problems at the state and local level; and an unsustainable deficit and debt burden at the federal level….
If what is happening now turns out to be something worse than a temporary soft patch, the market correction will continue further, thus weakening growth as the negative wealth effects of falling equity markets reduce private spending.” (“That Stalling Feeling”, Nouriel roubini, Project Syndicate)
More and more mainstream economists have joined Roubini in thinking that recent sluggishness is more than a soft patch. They think we may be headed for a double dip recession. Surprisingly, former chief economic advisor to the president, Lawrence Summers, has joined the Cassandras and is warning of stiffer headwinds just ahead. Here’s a clip from Summers recent op-ed in the Financial Times:
“…the US is now half way to a lost economic decade…..the problem in a period of high unemployment, as now, is a lack of business demand for employees not any lack of desire to work is all but self-evident… When demand is constraining an economy, there is little to be gained from increasing.